Gross Profit Formula

Gross Profit Formula calculates the profit that the business makes by selling its goods to its consumers after deducting the costs associated with it while making those products or the costs associated while providing those services. One can find a Gross profit figure on the firm's profit and loss statement, and the same can also be calculated by subtracting the COGS, which is the cost of goods sold from sales or revenue.

The gross profit formula is derived by subtracting the cost of goods sold from the net sales, where Net Sales are calculated by subtracting all the sales returns, discounts, and allowances from the Gross Sales, and the Cost Of Goods Sold (COGS) is calculated by subtracting the closing stock from the sum of opening stock and the purchases made during the period.

• Gross profit is the remaining amount when all direct costs, such as labor and raw materials, have been deducted from the income derived from selling the company's goods and services.
• The gross profit may be calculated using the formula: Calculation for Gross Profit: Revenue - Cost of Goods Sold.
• Only variable expenditures are included in this formula. Variable costs are those incurred by the firm that fluctuates in response to production.
• Raising the selling price of the goods or lowering the cost will result in higher gross profit. These two techniques both raise margins, which raise gross profit.

The gross profit formula in accounting is the profit after the deduction of the cost of goods sold. Thus, the formula used to calculate it is the total revenue minus the cost of goods sold. It shows the profit earned before deducting the interest, tax, and other expenses of the business.

The Equation for Gross profit is:

It determines how much money the business is directly spending to manufacture a product and how much profit is actually left behind after that. If sales gross profit formula An entity may have a high gross profit but its net profit, which is the income after the deduction of other expenses, interest, and income may be low. This proves that the business has good control over its cost of production.

The value of gross profit formula in accounting is also used to determine the gross margin which helps in comparison on a year-to-year basis for any business.

To calculate gross profit, one needs to follow the below steps.

• Step 1: Find out the Net sales or net revenue that takes a total of gross sales and reduces the same by sales return.
• Step 2: Secondly, the cost of sales includes all the variable costs the company incurs while making the product. Or delivering the services.
• Step 3: Gross profit formula would be to subtract the figure arrived in step 2 from step 1.

Let us understand the gross profit formula with example.

Example #1

ABC limited has given you the below details for their manufacturing financial details. We are required to calculate Gross Profit from the above details.

• Revenue: 5950560.00
• Raw Materials: 11901012.00
• Labor Charges: 16066366.20
• Cost of Sales: 44628795.00

We are required to calculate Gross Profit from the above details.

Solution:

Calculation of gross profit can be done as follows –

We have the Revenue and Cost of sale, which is nothing but the cost of goods sold.

Hence, Gross Profit will be = 5,95,05,060 – 4,46,28,795= 148762565

Note: The sales cost includes raw material and labor costs.

Example #2

An ltd and B ltd are two close competitors bidding in an auction to win the contract of $10 million. The bidding details are supposed to be kept secret. One of the key conditions for any of them to win the auction is that their gross profit figure should not be above 10% of the size of the contract. This condition has been kept secret. Else it would be easy for them to manipulate as the motive behind this is to capture the bidder's honesty and keep the quality of goods intact with low margins. Both of the firms have submitted the below details at auction.

We must calculate the gross margin and advise who could be the likely winner of the bid at this auction.

Solution:

Calculation of cost of goods for A Ltd can be done as follows –

Cost of Goods Sold = Opening Stock + Purchases – Closing Stock

=11200000 + 29750000 – 7000000

Cost of Goods Sold = 33950000

Calculation of GP for A Ltd can be done as follows –

Gross Profit in Excel is depicted as = 35000000 – 33950000

Calculation of the cost of goods for B Ltd can be done as follows –

Cost of Goods = 147000000 + 31150000 – 11665500

Cost of Goods = 34184500

Calculation of GP for B Ltd can be done as follows –

Gross Profit will be = 35000000 - 34184500

The condition was that the gross profit should be 10% of the contractor's size and 10% of $10 million, which is $10,00,000, and it appears B Ltd has more chances of winning the bid provided other conditions are also met.

The above gross profit formula with an example shows the method clearly.

Let us understand how the gross profit formula in excel is used to calculate the value.

VIP TV manufacturing is in the business of making smart android television. Therefore, an internal audit VIP tv manufacturing is into the business of making smart android television. Therefore, an

• Sale of 32-inch Smart TV: 6,72,00,000.00
• Sale of 43-inch Smart TV: 10,69,82,400.00
• Return of 32-inch Smart TV: 69,35,040
• Return of 43-inch Smart TV: 1,05,59,162.88
• Purchases: 12,48,00,000.00
• Labor Charges: 1,28,00,000.00
• Material Charges: 80,00,000.00
• Net Inventory: 12,50,000.00

The auditor is interested in calculating the GP of the company. Therefore, we need to calculate the sales gross profit formula of the company based on the above information.

Note: Net Inventory is opening stock minus closing stock.

Solution:

Calculation of gross profit can be done as follows –

Gross Profit will be =156688197.12 - 146850000

We can refer to the given excel sheet below for the detailed calculation of the gross profit formula in excel.

We can use the following Gross Profit Calculator

• It can also be called gross income, and as stated earlier, the same can be calculated by subtracting the cost of goods sold from net sales or net revenue.
• GP shall only include variable costs, which will never account for the fixed costs.
• It will assess the business’s efficiency, like how it uses its supplies and labor to produce services or goods.
• The higher the gross profit ratio to sales, the more efficient the business will attract competition.
• It can also be called gross income, and as stated earlier, the same can be calculated by subtracting the cost of goods sold from net sales or net revenue.
• GP shall only include variable costs, which will never account for the fixed costs.
• It will assess the business’s efficiency, like how it uses its supplies and labor to produce services or goods.
• The higher the gross profit ratio to sales, the more efficient the business will attract competition.

Gross profit is revenue minus cost of goods sold and net profit is gross profit minus interest, taxes, and any other operating expense. The basic differences between them are as follows:

This has been a guide to guide to what is Gross Profit Formula. We explain it using a template in excel with examples, and how to calculate & vs net profit formula. You can learn more about financial analysis from the following articles –

• Profit Formula
• Calculate Gross Profit Percentage
• Operating Profit vs Net Profit
• Economic Profit Definition